The tech incumbents’ impact on healthcare transformation
(For this month of newsletters, we invited our venture partner, Alex Chang, to share his thoughts regarding the increased involvement of incumbent tech companies in healthcare. Alex has accumulated depth and breadth in the industry as a product and regulatory affairs specialist across medical device and life science corporates over the past two decades. As SaMD emerged as the new trend in the past several years, he joined the force and has worked with a dozen tech incumbents, digital health unicorns, and early-to-stage startups.)
Where technologies meet the healthcare
There are four P’s of Healthcare:
Payers who are paying for the care (e.g. public and private insurers),
Providers who are delivering the care (e.g. clinics and hospitals),
Producers who are manufacturing the therapeutics, medications and devices (e.g. drug and device companies), and most important
Patients that are closely interlinked with the entire health ecosystem.
For over two decades, I’ve been involved heavily as a Producer, having worked in various capacities in the pharmaceuticals, medical device, diagnostics, and vaccines industry. Most of my career has been in Regulatory Affairs and Quality, but I’ve dabbled in other areas such as R&D and manufacturing. From the Producer side, I’ve seen breakthrough technology enter the marketplace, which helps improve the quality of life significantly. I’ve seen new regulations enacted to improve the Quality Management System and the overall safety and efficacy of the medical product. And I’ve also been around long enough to see how regulators such as the FDA have become less adversarial and more cooperative to help manufacturers get products approved to the end user: the patients.
From the Provider-Payer side, there is an emphasis on clinical outcomes when it comes to reimbursement. For example, providers recently pushed to have value-based contracts in place of the traditional fee-for-service mode with the payers. With value-based contracts, it incentivizes clinicians to deliver better care for better health outcomes at better costs and penalizes ineffective clinicians, and wastes healthcare dollars. The Centers for Medicare and Medicaid Services (CMS) recently penalized hospitals for excessive readmissions and medical errors. Since hospitals operate at a very small margin, it is in their best interest to demonstrate their commitment to efficiency, reduced healthcare consumption, and greater clinical outcome when negotiating with the payers (insurance companies).
Digital solutions that stem from this healthcare initiative (and magnified during the pandemic) are:
Remote Patient Monitoring – reduces hospital stays as vitals can be communicated to the physician remotely
Telehealth – remote access to physicians for patients in rural areas. It is now common for patients in the suburbs and cities as this mode of communication is preferred by the younger demographics.
Electronic Medical Records (EMRs), cybersecurity, data privacy, and interoperability – As information is being shared digitally, this introduces many challenges to keep the information private and secure, as well as ensuring that the data can be exchanged across multiple platforms.
Data Analytics – Improved analytics in Artificial Intelligence and Machine Learning (AI/ML) give rise to faster therapeutic development and tracking tools to analyze trends and health over time for earlier analysis and intervention. As health information is being shared, Big Data can help analyze health outcomes and better treatment.
Incumbents that take aggressive approaches to expand into the heavily regulated sector
These opportunities aren’t restricted to just the healthcare industry. Tech giants such as Apple, Amazon, and Google have entered the fray and have invested heavily in healthcare, utilizing their strengths and staying true to their DNA.
Apple has a stronghold in the consumer market and appears committed to turning its consumer products into portable patient health hubs, with their Apple Watch paired with their iPhones being central to that ecosystem. With their high adoption rate and brand loyalty, they are poised to dominate the remote patient monitoring sector if they so desire. But they seem more focused on their wellness program and pushing subscribers to the Apple Fitness+ program.
Amazon is utilizing its strengths in logistics and distribution with the online pharmacy division, Pillpack. With the recent acquisition of One Medical, they now have a way to interface with patients through the vast network of One Medical doctors for on-site visits and telehealth access to increase prescription orders.
Alphabet is changing healthcare through its dominance in data analytics to streamline clinical research in its Google Health division. With their Fitbit division, they are a significant player in the consumer wellness sector, and they continue to be life science driven under their Verily Life Sciences umbrella.
Other players are entering into digital health that is just as impactful. Oracle, for example, is attempting to corner Electronic Health Records with their acquisition of Cerner late last year. And Microsoft is engaged with their Azure Health Data Cloud service that integrates with their Microsoft Teams platform. Many of the offerings overlap one another from company to company, and there is no clear winner that dominates all digital health sectors.
What of the traditional healthcare companies? Through the years, I’ve noticed a resurgence of healthcare investment in the medical device and diagnostic sectors, which may directly correlate with technological advancement and faster computer processing speed. There is an untapped potential as to what technology can do to aid in promoting life science. Multiplex assays are making it possible to screen multiple analytes simultaneously without the need to screen one analyte at-a-time. More and more devices are becoming portable point of care (POC) devices that can fit in the palm and be used near-patient for real-time results. In addition, the Next Generation Sequencing (NGS) platform, with its speed, throughput and accuracy, is revolutionizing how DNA/RNA is analyzed in genomic and clinical research. Traditional healthcare companies such as Roche, Thermo Fisher, Abbott, and Siemens dominate this sector with their focus on companion diagnostics and precision medicine, and new players such as Illumina, Guardant Health, 23andMe, Pear Therapeutics are joining the mix. So, the question is, “Will the influx of Big Tech, with deep pockets, moving into healthcare be a threat to the traditional healthcare company?” Not necessarily. Life science isn’t Big Tech’s focus, and they are decades behind their healthcare counterparts.
Returning to the consumer tech industry, Big Tech invests significant capital into its health division. Much is because of their strategy to lock more people into their ecosystem. But what is most surprising is the company’s rapid adoption of healthcare regulations and compliance. If you would have seen the state of the healthcare division five years ago to what it is now, it is unrecognizable. I give a lot of credit to the regulatory and quality departments for convincing management to overhaul their health division completely and hire medical device professionals with relevant FDA submission and QMS experiences to do the job. It must not have been easy to introduce something as complex as the medical device regulations into the company’s DNA. But despite the massive change, it remains an uphill battle for them as the healthcare division only serves as a fraction of their overall revenue and thus remains a lower priority regarding further expenditures and investments. Areas where I am impressed were their software development process and attentiveness to customer feedback, usability, cybersecurity, and data privacy, where medical device companies should take a page from their book.
The introduction of healthcare from Big Tech changed the healthcare sector's dynamics as they are trillion-dollar companies that have become overnight competitors to healthcare companies. But I would be remiss if I did not mention their impact on the FDA’s approach to regulating medical devices, specifically software. Whether it is happenstance or a happy accident, many FDA regulations were enacted in favor of consumer tech companies. As a result of the 21st Century Cures Act, several wellness devices intended for “maintaining or encouraging a healthy lifestyle” were no longer classified as a device under the FD&C Act and were exempt from FDA oversight. This led to many wellness devices in the big box stores. That same year FDA announced the Software Pre-certification program as part of their Digital Health Innovation Action Plan, which I am still on the fence with. The Pre-cert pilot program, in which Apple, Fitbit, Samsung, and Verily were participants, envisions an approach where a manufacturer must first demonstrate a culture of quality and organizational excellence in the five principles: (1) Product Quality, (2) Patient Safety, (3) Clinical Responsibility, (4) Cybersecurity Responsibility and (5) Proactive Culture. Once the software developer demonstrates that they have met the degree of excellence, theoretically, any low to moderate-risk software within the organization can be exempt from pre-market submission so that FDA can maximize their engagement for higher-risk devices. I wonder if these big tech companies had any influence in policymaking, considering that these companies represent a significant portion of our country’s GDP.
The foundation to build an economic moat
With Big Tech as incumbents, what does this mean for new entrants trying to compete? Are the barriers to entry so great that it’s pointless even to try? Of course not. A company’s success is based on the CEO’s leadership and how best he/she can steer the company to follow the company’s vision. A good leader is selfless and inspirational and can lead by example. In turn, the company will incite loyalty among the employees, each willing to put in their 110%. I have worked in many start-ups in my career, and I have experienced first-hand how infectious it is to work with employees that share the same vision. In that same company, I’ve also experienced its downfall when the employees lose faith in leadership, resulting in the mob mentality of quiet quitting. Much of the downfall is attributed to the lack of funding and the need to appease the Board. In a sense, a young start-up has the advantage of not being burdened by shareholders and navigating through corporate America's red tape. Having worked at start-ups, mid-size, and large companies, I do have an affinity for smaller companies as I dislike being just a cog in a machine. Plus, I enjoy the sense of comradery in working at smaller companies. As movie story-telling and real-life history have shown us, any small and united rebel force can take down an evil empire.
Some advice? Take on a beachhead approach. Capture as small a market as possible and prove to your customers that you have built a better mousetrap. Don’t underestimate the power of social media. If your product is superior, word of mouth will quickly spread through LinkedIn, YouTube, Twitter, or even TikTok, and in doing so, you create brand loyalty. Amazon may be involved in Telehealth and online prescriptions, and I am locked into their ecosystem with their Prime Membership, but I still use Hims/Hers for my Men’s Healthcare needs because that’s their niche. I am grateful for not having any mental health issues, but if so, I may use Cerebral Health.
Another example is Apple. As an Apple fanboy, I am so deeply integrated into their ecosystem that the switchover cost will be too great. But if a company can develop a wearable that can track my blood sugar level or aid in tracking my sleep apnea, I would trade in my Apple Watch in a heartbeat.
Final advice if you are a new entrant? Unless you are developing a new product category or new features that demand a first-mover advantage, don’t rush into the market. Launching an inferior product that will be immediately compared with the incumbents as a cheap knock-off will be challenging to recover from. Also, believe in yourself. The leadership at the Big Tech companies is not as passionate as an entrepreneur regarding product development. As an investor, there is no greater indicator of success than having a great team. The only hand that may trump that is to have great Intellectual Property or Trade Secret. But these days, that is hard to come by.
The need for digital health solutions introduced many opportunities for the tech industry to enter healthcare. This has given rise to telehealth, remote patient monitoring, data sharing, and data analytics, improving accessibility, interoperability, and overall health economics. We welcome the newfound focus of healthcare in the tech companies, and there is room for fledging entrepreneurs planning to become new entrants. In the grand scheme, the added innovation and competition benefit the healthcare ecosystem's most important “P.” And that being the patient.
Alex